Reforming America’s Housing Finance Market

By Ken Trepeta

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RISMEDIA, April 2, 2011—The National Association of REALTORS® (NAR) recognizes the need for an orderly transition from the current form of the secondary mortgage market to a new structure that removes some of the pitfalls under the old GSE structure. The Obama Administration recently released a white paper with many options for changing the mortgage market. NAR appreciates the Administration’s desire to engage stakeholders in any final plan and is seeking to serve on any advisory panel that will study the consolidation of federal incentives for housing. REALTORS® want to help design a secondary mortgage model that will serve homeowners today, and in the future, and ensure a strong housing market and full economic recovery.

A pillar of NAR’s recommendations is that there can be no restoration of the former secondary mortgage market with entities that take private profits and push losses onto the taxpayer. The new system must involve some government presence, outside of FHA, USDA, and the Department of Veterans Affairs, to ensure a continued flow of capital to housing markets during economic downturns when large lenders flee the housing market.

There are areas within the Administration’s plan that do not coincide with the recommendations set forth by NAR and its members:

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Proposed Secondary Market Changes
Ultimately winding down the GSEs—REALTORS® believe that government participation is required in the secondary mortgage market to ensure the continual flow of mortgage capital to all markets in all economic conditions. Shuttering the GSEs without a mechanism for seamless government participation in the secondary market during economic downturns will increase the likelihood of a future housing finance system failure.

Proposed increase in down payment amount—A 10 perecent down payment will be problematic for many first-time buyers and even repeat buyers. This change, coupled with the proposed drop in FHA loan limits and other changes to FHA, will mean that home buyers in higher cost metro markets will have to pay significantly higher private capital costs or delay their purchases despite having the incomes necessary to carry the costs of a home purchase with a lower down payment FHA or conventional loan with mortgage insurance.

Proposed decrease in loan limits—High cost areas will be negatively impacted as the cost of capital to the consumer will increase significantly. Though experts have stated that the receding of government involvement in loans up to $729,500 will spur private capital to the market place, evidence to that effect is very limited.

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Increased guarantee fees (g-fees) for the GSEs—Increasing g-fees will become an additional burden for potential home buyers. We understand that prudent underwriting is required; however, this over-correction has become more costly and is prohibiting consumers who can afford home payments from participating in the market.

Winding down the GSEs portfolio—NAR has advocated for reduced portfolios of both Fannie Mae and Freddie Mac; however, full eradication should not be the goal for a new secondary market entity. Shuttering this important tool completely will rid the secondary market of an important tool for innovation and transaction management.

Proposed FHA Changes
Reduced FHA loan limits—Allowing the current loan limits to decrease will have an immediate negative impact on mortgage liquidity for numerous markets in the nation.

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Increases to MIP will eventually price out of the market many low-mod families. Even if changes to loan limits go out the window, steadily increasing fees, looking to increase the down payment, etc. will make FHA less affordable to those whom it is meant to serve.

Congress and the Administration must be very careful and deliberative in their work to reform the secondary mortgage market. For the sake of homeowners, home buyers, the housing economy, and the overall economic recovery, it is more important that this gets done right than that it get done soon.

Ken Trepeta is the director of Real Estate Services for the National Association of Realtors®.